Jury remains out on diamond diggers

Trans Hex is but one of dozens of members of the world's most troubled mining subsector

There has been strong domestic response to the somewhat favourable comments over diamond miner Trans Hex  by Cape Town-based Regarding Capital Management founder Piet Viljoen, who holds the stock on behalf of clients. Viljoen says the stock was "ridiculously cheap" when it traded down to R1 a share earlier this year, and argued that its intrinsic value was currently more like something between R5 and R20 a share, compared to recent trades just below R3 a share.

"The results that came out a couple of weeks ago showed that it looked like it was turning the corner", said Viljoen. "That's the thing with market prices. They are in very many instances based on the short-term outlook of investors. So six months ago the short-term outlook for Trans Hex was dire, commodity prices including diamond prices were declining, it had cash-flow problems in Angola so investors sold it down dramatically . . . Now it seems that the outlook based investors are revising their outlook from very bad to less bad or neutral and the share price is going up".

Over the past week, however, pricing patterns among more than 1 000 mining stocks listed around the world indicate strong selling of certain subsectors, led down by listed primary silver miners, followed by gold miners, and then, diamond miners. A week is a short time, for some, but the historic 12-month picture for listed diamond miners remains bleak. Measured on a weighted basis, 54 listed diamond miners and developers around the world currently display stock prices that are on average 80% below highs, seen during 2008. There is no other mining subsector where ongoing stock price losses are so deep.

While the investible market value of listed diamond miners excludes unlisted De Beers, the biggest name in the business, the value of listed diamond names fell from an aggregated $9.8bn, seen in 2008, to $878m, and has since risen to $1.9bn. Relative to other mining subsectors, more diamond mines around the world have been closed, curtailed, or mothballed. Liquidity issues in the global diamond sector, running from miners to cutters and polishers, remain acute, even at the top end.

In its 2008 results, released on February 20 2009, De Beers disclosed loans from shareholders (Anglo American, 45%; the Oppenheimer family, 45%, and the Botswana government, 10%) of $248m. In its 2008 results, released on the same day, Anglo American disclosed that further shareholder loans of some $500m would be made to De Beers during 2009. This would take total net debt at De Beers to around $4.5bn, of which $3.6bn is interest bearing.

In April this year, Gem Diamonds, one of only two listed primary diamond stocks with a market value well over $100m (along with Harry Winston),  announced a series of drastic measures, plus a hugely dilutive rights issue, to raise a total target of $107m equivalent.

Already in November 2008, Gem Diamonds announced an operational review focusing on profitability; De Beers announced production cuts to come. In December BHP Billiton announced plans to withdraw from diamond exploration agreements in the Democratic Republic of the Congo; Canada's Diavik (mainly Rio Tinto) said it would delay planned underground mining, and Petra Diamonds reduced exploration in Angola, Botswana, and Sierra Leone. In January 2009, Debswana, a joint venture between the Botswana government and De Beers, and the world's biggest diamond miner, suspended production at its four mines.

Russia's Alrosa said it would target non-core cost reductions (excluding underground mining) of about $150m during 2009; Australia's Argyle (Rio Tinto) halted production for three months for extended maintenance, and slowed underground development. A phalanx of smaller diamond companies announced any number of drastic measures, as seen from, for instance, Namakwa Diamonds; diamond names with stock prices currently 90% and more off highs include BRC Diamondcore, Pangea Diamondfields, Archangel Diamonds, Nordic Diamonds, Kimberley Consolidated, Lonrho Mining, and Renison Consolidated.

In February BHP Billiton said it would reduce production at Canada's Ekati; De Beers cut production at Snap Lake and Victor mines, also in Canada; Diavik deferred capital expenditure and trimmed operating expenditure further, and Debswana confirmed that Damtshaa and Orapa No.2 were closed for 2009. In March, Namdeb (Namibian government and De Beers) considered closing production for three months. A number of diamond companies have scrambled to activate other parts of held mineral interests; Bonaparte Diamonds, for one, is pursuing the mining of seabed phosphates.

In the past while, some production restarts have been noted, but the outlook for diamond prices is as clear as mud. In a communiqué to clients earlier this week, analysts at RBC Capital Markets, having recently returned from a visit to the Antwerp diamond centre, where discussions were held with diamantaires, bankers and valuators, stated that "the distinct impression we came away with is that, following the market bottom in early calendar 2009, prices of rough diamonds have improved substantially, possibly as much as 50% for some stones.

"However, with the return of supply from De Beers, and the potential sale of diamonds from Russia, in the near-term we believe rough prices could be poised for another decline . . . We believe the worst of the downturn is over for rough diamond producers, and that the longer-term outlook has improved over the past three months".

Few investors have shown enthusiasm for strategic stakes in diamond miners. In March, however, Kinross, a global Tier I gold digger, said it would make "a net investment of $150m in exchange for an indirect interest in the Diavik Diamond Mine in Canada's Northwest Territories and a 19.9% shareholding in Harry Winston". However, while Harry Winston held a 31% interest (prior to Kinross's announcement) in Rio Tinto's Diavik diamond mine, 300 kilometres northeast of Yellowknife, Northwest Territories, Harry Winston also owns 100% of an ultra high-end jeweller retailing operation with 19 stores located in high-end retailing centres around the world.

Write to Barry Sergeant: barry@moneyweb.co.za

Services Subscribe to newsletters News feeds

Print story    Email story Related Links Articles:  Behind Trans Hex's 150% jump Trans Hex posts loss of R819m

COMMENTS